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Stablecoins Falling Out of Favor? Report Shows 16-Month Low in Market Cap as Regulators Step In

Published July 21, 2023 11:43 AM
Teuta Franjkovic
Published July 21, 2023 11:43 AM
Key Takeaways
  • There is a 16-month fall in stablecoin market cap that now stands at $127 billion
  • According to a CCData analysis, Stablecoin trading volumes increased by 16.6% to $483 billion in June
  • With a record-breaking market valuation of $83.8 billion, USDT continues to be the leading stablecoin
  • If BUSD fails, other stablecoin projects may be in danger because of regulatory press
  • If Tether falls under SEC actions, this could mean a fall of stablecoins as we know them

According to a new estimate, the market cap of stablecoins has fallen for 16 straight months to its lowest point since August 2021.

The stablecoin market cap decreased by 0.82% from the beginning of the month until July 17, according to a study published on July 20 by cryptocurrency analytics platform CCData , bringing the sector’s market size to $127 billion.

A Large Decline in Market Capitalisation For USDP

The market share of stablecoins decreased somewhat and is now 10.3%, down from 10.5% in June.

Pax Dollar (USDP), one of the top ten stablecoins, was the hardest impacted, plummeting 43.1% to $563 million in July, its lowest level since December 2020.

According to CCData, the MakerDAO, the decentralized autonomous organization that powers the Maker protocol, decided to withdraw $500 million of USDP from its reserves since it was unable to generate more income.

It All Started With BUSD

Over the past several months, the SEC has classified a number of cryptocurrencies as securities in separate cases. In its recent action against Binance, the SEC claimed that BUSD, a stablecoin promoted by Binance, has been a security “since its inception.”

Following an order to stop handling BUSD issued by the New York Department of Financial Services a few months ago, the SEC took this step.  Changpeng Zhao, the CEO of Binance, recently acknowledged that the BUSD stablecoin wasn’t always completely supported by reserves in 2020 and 2021. However, the business asserted that the issue has been resolved and that it never had an impact on user redemptions.

If BUSD fails, other stablecoin projects may be in danger because of regulatory pressure.

Is Tether the Next One to Face SEC Action?

By market cap, Tether is the biggest stablecoin, and as of July 17, it has reached an all-time high market worth of $83.8 billion, giving it a 65.9% market share.

It’s no secret that the SEC and the cryptocurrency sector are engaged in a bitter battle. The largest cryptocurrency exchange in the world, Binance, was sued by the commission last month for a series of alleged offenses in thirteen different lawsuits.

Additionally, the SEC sued Ripple for allegedly dealing in unregistered securities. They even sued Coinbase, the largest cryptocurrency exchange based in the US, for allegedly committing the same crime while defying a formal order from Coinbase to implement appropriate laws for cryptocurrency trading.

More crucially, the SEC is waging battle not only against the trading of decentralized tokens like Bitcoin and Ethereum, but also against stablecoins, as they did with BUSD, in an effort to undermine their credibility.

The market for stablecoins is, however, dominated by USDT, the token related to Tether’s USD currency. The SEC’s assault on cryptocurrencies may soon turn its attention to USDT, a coin that isolates itself from the volatility of decentralized tokens like Bitcoin by basing its value on the US dollar and offering digital-based transfer options and ease of movement.

Market capitalizations for USD Coin (USDC) and Binance USD (BUSD) decreased to $26.9 billion and $3.96 billion, respectively, by 3.01% and 4.57%. The market capitalization of USDC has dropped for seven months in a row, reaching its lowest level since June 2021.

Stablecoin Trading Volume Rises

Although stablecoin trading volumes had previously declined, they rose for the first time since March in June, rising 16.6% to nearly $483 billion.

Top 10 stablecoins
Top 10 stablecoins | Credit: CCDATA

The rise in spot Bitcoin exchange-traded fund filings, according to CCData, as well as the lawsuits brought by the Securities and Exchange Commission (SEC) against Binance and Coinbase, are thought to be responsible for the rise in stablecoin trading volumes last month.

Stablecoin trading volumes last month increased due to BTC exchange-traded fund filings.

The suspension of fiat deposits on Binance.US due to the SEC’s lawsuit against the company was another significant development in June. This allegedly caused USDT and USDC to depeg from the US dollar on the exchange, according to CCData.

“The suspension of fiat deposits has led to a drastic decline in the liquidity of the [USDT and USDC] stablecoins, resulting in a discount of around 27% and 18% respectively.”

The market cap of the decentralized stablecoin market, which consists of Dai (DAI), Frax (FRAX), and USDD (USDD), rose by 0.43% to $7.52 billion in July, marking the first uptick since February. However, the market cap is still down 78.1% from its $34.3 billion all-time high in April.

Terra Luna Depeg Started the Downward Spiral

The demise of the Terra Luna ecosystem and the nearly 100% depeg of the algorithmic stablecoin TerraClassicUSD (USTC) marked the start of this downward spiral.

Just for a reminder, TerraUSD’s (UST) fall occurred in three stages. Two traders initially broke the peg of UST; Terraform Labs and three supporters then corrected it by purchasing $2 billion worth of UST; and finally, the sell-off continued, exhausting those funds, driving up the price of LUNA, UST’s sister token, and collapsing the price of both LUNA and UST.

Due to its uncollateralized construction, UST might be more brittle than other stablecoin variants. Despite the fact that redemptions of other stablecoins did briefly peak, the current drop in the cryptocurrency market seems to be more closely linked to the decline in the IT business than to the failure of UST.

The Joint L1 Task Force and RedlineDrifter-led Quant development teams have now teamed up by launching voting on the Terra Luna Classic’s incremental repeg modeling and simulation proposal for the TerraClassicUSD (USTC). This is done in an effort to restore USTC’s value and subtly raise the price of LUNC to the community’s desired aim of $1.

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